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Signal Bars and Entry Bars

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Ok, I've filled my chart with levels and indicators, now what? On the time frame of your choice there must be a trigger for entry to any trade. The most obvious signs are the candlesticks. If the candlesticks show an immediate reversal pattern (though it may be temporarily) that coincides with a level you have previously signed as a very likely turning point then you have a signal pattern and just need suitable conformation on the next bar for entry

 

The best candlestick signals are:

- a pin (Pinocchio) bar (also called hammer, inverted hammer, shooting star, or hanging man depending on context)

- a twin bar (also called tweezers depending on shape)

- or an engulfing bar,

The key is that it hits close to the level and shows clear, obvious, unmistakable rejection of that level.

The more sharp the approach and then clearly rejects the level the better, if price drifts to and then lingers unsure of the level, get worried.

 

Entry must come after the pattern rejects your level and reverses signifying the level you have chosen is significant (yes, when you look at the number of levels you have drawn it is a gamble isn't it).

 

The entry bar is usually the next bar, some traders take the close of the signal pattern, some traders take the open of the entry bar as it moves in the right direction, some traders take the entry bar as it engulfs the the signal pattern, it's your choice. 

 

Good Luck.

 

 

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Nice summary  this is an area I am aware of but not fully educated on.  Funny enough when I do learn something, like the Pinocchio bar thing for instance, I often find I am doing it naturally anyway.  Two things and a watch out jump out at me with this stuff:

  1. Your point about using it only where it matches other analysis to help time entry - Agree
  2. Your point about fast strong rejection of a level (and repeated) and entry after this has become manifest - Agree

The watch out is, as you also mentioned I think, that there are many false signals.  This is an area I want to read up more on but only to use as an add on to the rest of my approach.  One can get very fixated about types of candles and start seeing them all over the place don't you think?

 

 

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Thanks  and good point about false signals, if you look hard enough you will see signals all over the place. So marrying significant levels to significant candle patterns is a good lesson to pick up on. And to consider the way price behaves as it approaches a level, reacts at the level, and then responds gives many clues as to the outcome.

 

I'm sure you noticed I (deliberately) did not mention limit orders, I wanted to help break things down for new traders and my thinking was, new trader having drawn up loads of levels then told to use limit orders, may as well give them a stick of dynamite and a box of matches.

 

With stop orders the trade has at least started off in the right direction.

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Totally agree.  I would only use limit orders if I felt very strongly about a congestion zone at a turning point that is likely to occur over night.  Otherwise Stop orders after the turn are the way to go.  There is a risk with stop orders if you get the positioning wrong that the market starts a retrace and takes out your protective stop before resuming its original course in the direction of the trade.  Placing a stop order sufficiently below a congestion zone to catch a break through is the way to do this but impatience often drives traders to go in too early, which is ok if you have a very wide stop.  This is why I spend so much time on retrace rallies and tramline kiss analysis so that I can pick up entries on the turn of the retrace, my favourite place to trade. 

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